Study Finds Jobless Rates in Canada, U.S. May Have Exaggerated Improvements Since Recession

OTTAWA—A study by Canada's central bank has found that official unemployment rates in Canada and the U.S. might have exaggerated improvements in the labor market since the recession.

The Canadian jobless rate may have "modestly" overstated actual conditions, and the U.S. number may have "significantly" overstated them, according to a measure constructed by the Bank of Canada.

The labor market indicator, or LMI, compresses much of the information about labor market conditions into a single composite measure, the central bank said in a paper published in the semi-annual Bank of Canada Review Tuesday.

The indicator declined 0.5 percentage point between 2010 and 2013 in Canada versus the 0.9 percentage point drop in the unemployment rate published by Statistics Canada. The difference is more pronounced in the U.S., where the alternative measure declined 1.1 percentage points compared with a 2.3 percentage point drop in the official unemployment rate.

Last week, Canada's Auditor General said key job-vacancy data produced by Statistics Canada have limited value for job hunters because they don't specify the locations and type of workers sought.

The health of the labor market is crucial for monetary policy. Although the Bank of Canada's policy-setting goal is centered on reaching a 2% inflation rate, inflationary pressures are partly determined by labor market conditions. In the U.S., labor market outcomes are an explicit component of the Federal Reserve's dual mandate of achieving maximum employment and price stability.

According to the most recent data, Canada's unemployment rate stood at 6.9% in April despite an unexpected decline of 28,900 jobs during the month, because thousands of people stopped looking for work.

In the U.S., the jobless rate sank to 6.3% in April as non-farm employment grew by 288,000.

The Bank of Canada has held its benchmark overnight rate steady at 1% for more than 3 1/2 years and shifted to neutral gear last fall when it abandoned long-standing signals of potential rate hikes, worrying--like other counterparts in the developed world--about low inflation. Consumer prices in Canada have languished below the 2% target for nearly two years.